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U.S. Industrials Sector Analysis

UpdatedOct 01, 2022
DataAggregated Company Financials
  • 7D-1.9%
  • 3M-4.3%
  • 1Y-19.6%
  • YTD-23.0%

The Industrials industry is down 1.9% over the last week with Lockheed Martin the worst performer, down 6.5%. Meanwhile, Builders FirstSource actually outperformed within the industry, gaining 8.8% in the last week. The industry has fallen 20% in the last year. Earnings are forecast to grow by 15% annually.

Sector Valuation and Performance

Has the U.S. Industrials Sector valuation changed over the past few years?

DateMarket CapRevenueEarningsPEAbsolute PEPS
Sat, 01 Oct 2022US$3.4tUS$2.4tUS$146.5b15.4x23.5x1.4x
Mon, 29 Aug 2022US$3.9tUS$2.4tUS$146.2b17.6x26.7x1.6x
Wed, 27 Jul 2022US$3.7tUS$2.3tUS$143.6b17x25.9x1.6x
Fri, 24 Jun 2022US$3.5tUS$2.3tUS$145.0b16x24.4x1.5x
Sun, 22 May 2022US$3.7tUS$2.3tUS$145.2b16.8x25.5x1.6x
Tue, 19 Apr 2022US$4.1tUS$2.2tUS$150.1b19.8x27.6x1.8x
Thu, 17 Mar 2022US$4.3tUS$2.2tUS$155.0b21.1x27.8x1.9x
Sat, 12 Feb 2022US$4.2tUS$2.2tUS$141.6b21.8x29.9x1.9x
Mon, 10 Jan 2022US$4.6tUS$2.2tUS$134.3b23.9x33.9x2.1x
Wed, 08 Dec 2021US$4.6tUS$2.1tUS$142.6b24x31.9x2.1x
Fri, 05 Nov 2021US$4.6tUS$2.1tUS$138.3b25.5x33.3x2.2x
Sun, 03 Oct 2021US$4.3tUS$2.1tUS$123.8b24.7x34.8x2.1x
Tue, 31 Aug 2021US$4.5tUS$2.1tUS$123.6b25.4x36.1x2.2x
Wed, 07 Jul 2021US$4.4tUS$2.0tUS$121.1b24.6x36.6x2.2x
Sat, 10 Apr 2021US$4.1tUS$1.9tUS$86.4b29x47.6x2.2x
Fri, 01 Jan 2021US$3.6tUS$1.8tUS$67.5b26.2x52.7x2x
Mon, 05 Oct 2020US$3.2tUS$1.9tUS$74.4b21.9x42.4x1.7x
Thu, 09 Jul 2020US$2.8tUS$1.9tUS$82.5b20.2x34.3x1.5x
Wed, 01 Apr 2020US$2.4tUS$2.0tUS$110.0b14.3x21.6x1.2x
Sat, 04 Jan 2020US$3.2tUS$2.0tUS$118.5b20.2x26.9x1.6x
Tue, 08 Oct 2019US$3.0tUS$2.0tUS$121.7b18.5x24.6x1.5x
Price to Earnings Ratio


Total Market Cap: US$3.0tTotal Earnings: US$121.7bTotal Revenue: US$2.0tTotal Market Cap vs Earnings and Revenue0%0%0%
U.S. Industrials Sector Price to Earnings3Y Average 34.3x202020212022
Current Industry PE
  • Investors are pessimistic on the American Industrials industry, indicating that they anticipate long term growth rates will be lower than they have historically.
  • The industry is trading at a PE ratio of 23.5x which is lower than its 3-year average PE of 34.3x.
  • The 3-year average PS ratio of 1.8x is higher than the industry's current PS ratio of 1.4x.
Past Earnings Growth
  • The earnings for companies in the Industrials industry have grown 6.4% per year over the last three years.
  • Revenues for these companies have grown 5.8% per year.
  • This means that more sales are being generated by these companies overall, and subsequently their profits are increasing too.

Industry Trends

Which industries have driven the changes within the U.S. Industrials sector?

US Market-2.48%
Trade Distributors0.14%
Professional Services-1.69%
Commercial Services-2.39%
Aerospace & Defense-3.12%
Marine and Shipping-3.47%
Industry PE
  • Investors are most optimistic about the Transportation industry which is trading above its 3-year average PE ratio of 161x.
    • Analysts are expecting annual earnings growth of 16.1%, which is lower than the prior year's growth of 62.5% per year.
Forecasted Growth
  • Analysts are most optimistic on the Airlines industry, expecting annual earnings growth of 41% over the next 5 years.
  • This is better than its past earnings decline of 9.9% per year.
  • In contrast, the Marine and Shipping industry is expected to see its earnings decline by 14% per year over the next few years.

Top Stock Gainers and Losers

Which companies have driven the market over the last 7 days?

CompanyLast Price7D1YValuation
BLDR Builders FirstSourceUS$58.928.8%
CAR Avis Budget GroupUS$148.467.4%
URI United RentalsUS$270.122.6%
R Ryder SystemUS$75.4912.9%
CSL Carlisle CompaniesUS$280.412.6%
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Latest News

Sep 28

General Electric: Almost Reached 'Buy' Status But Not Yet

Summary The aviation industry requires fleet renewal, and the investment cycle will last for more than a year. General Electric is the main producer of aircraft engines and will be a major beneficiary of the increase in aircraft production rates. The wind turbine manufacturing division looks inefficient, the medium-term prospects of the sector remain uncertain, even with the resumption of tax benefits. We maintain HOLD status on GE stock, but we may upgrade it to BUY soon. Fundamentally the company looks good, but we are willing to wait for a decline in the major indices and more attractive upside. Investment Thesis General Electric, as a major manufacturer of aircraft engines, it looks attractive due to large-scale investment cycle of the aircraft industry. Despite the difficulties in the renewable energy segment, we expect investors to start opening positions in the stock. According to our valuation, the company's shares already have good upside, but we are willing to wait for further decline in stock and indices. Underinvestment in aviation industry is a strong driver for General Electric The General Aviation division remains the most successful business segment, both in terms of revenue growth and profitability. It is highly likely to show similar dynamics, at least in the next few years. The 2020 pandemic caused significant damage to the industry as a whole and forced most major airlines to shrink their fleets. Despite recovering aircraft deliveries, according to IATA, total capacity was down by 28% in June vs. the same month in 2019. IATA Fleet reduction and halting of deliveries in 2020-2021 resulted in the major carriers' fleet becoming obsolete today, and the companies themselves cannot fully meet the recovered demand even for domestic transportation. With the subsequent recovery of international tourism, carriers will need even more aircraft, according to Airfleets. Airfleets Boeing and Airbus have already started to elevate production rates, in particular, Boeing has increased the pace of production of the most popular B-737 model family up to 31 planes per month vs. 16 planes/ month a year earlier). Airbus is expected to produce 75 similar aircraft of A320 family by 2025, which implies a 50% increase in the current production rate. In addition, other aircraft models with General Electric engines will be available for operation in the foreseeable future. For example, Boeing 787 with GEnx engines is likely to be delivered since Q3 2022. Meanwhile, the deliveries of A321NLX have been postponed until 2024, and this model will have CFM Leap engines made by General Electric and French Safran Aircraft Engines. General Electric has an almost monopolistic position in civil aviation, providing engines for the largest aircraft manufacturers. Due to underinvestment, and retirement of aircraft in 2020, the total number of planes has not changed much in 10 years, according to FAA. Therefore, we expect the observed trend of strong revenue growth and high profitability to be long-lasting. The airline industry is heading for a long investment cycle in which General Electric will become the main supplier of engines for aircraft. FAA Invest Heroes According to our estimates, General Electric Aviation revenue will grow at an average rate of 9.8% y/y over the next four years. Meanwhile, the company is expected to improve its profitability to 20.6% by 2025 via mitigating inflationary pressure and updating contract prices. Renewable energy sector looks weak, even with the latest Congress check Despite bright prospects of the aviation sector, Renewable Energy division of General Electrics is experiencing difficulties, and we do not expect significant improvements in the medium term. As for the renewable energy sector, General Electric is focused on production and maintenance of wind turbines and related infrastructure. The company experienced problems with orders in 1H 2022, largely due to uncertainties in U.S. law and delay in the extension of PTC and ITC benefits. Although in August the benefits were prolonged till 2025 and he market started to bet on renewable energy producers, we don't believe it will have strong effect on financial results of General Electric in the next 2-3 years. Firstly, wind power is severely limited in terms of consumer base. Due to high cost and scale of wind turbines, according to Energy Efficiency & Renewables Energy, using them in individual projects is very expensive and almost always makes no sense. Orders for generators come from large companies that can afford big projects - the bulk is for projects >200 MW, which is equivalent to installing >80 turbines. Energy Efficiency & Renewables Energy Owing to high concentration of customers in the corporate segment, the correlation between orders and tax benefits of Congress is less linear than when a large share of buyers is in the private sector. Since construction takes place under long-term contracts and buyers have the option to postpone delivery to later dates, the main goal is to start construction before the deadline. Under the previous tax benefits, the bulk of the capacity increase always occurred during the last year of validity period of the law. Therefore, we expect a similar pattern in the new cycle and an increase in deliveries in 2025, according to Energy Efficiency & Renewables Energy. Energy Efficiency & Renewables Energy General Electric, though a major supplier of wind turbines in the U.S., is cutting turbine production rates to ~2 000 per year (about a half of the company's actual capacity) to reduce costs. We expect the company to recover production capacity by 2024. The rest of General Electric's segments, Gas & Power, and Healthcare, remain stable, and we see no strong catalysts for notable improvement in financial results over the medium term. GE Stock Valuation According to our forecast, in the next four years, the company's EBITDA will increase at an average rate of 11%, overtaking the rate of revenue growth. It will be supported by correction of commodity prices and new pricing policy, which is already being implemented by the company's management in all business segments. Invest Heroes According to our valuation, the instruct value of GE stock is $96.0/share, and we maintain HOLD status. Upside-28%.

Sep 26

Improved Valuation Makes Union Pacific Worth Considering

Summary UNP has fallen 27% from the 12-month high at the end of March. Labor issues, fuel costs, and inflation have posed challenges. U.S. rail volumes are falling. The Wall Street consensus outlook is bullish, with expected return of 22% over the next year. The market-implied outlook (calculated from options prices) is bullish to early- and mid-2022, albeit with elevated volatility. Union Pacific (UNP) closed at a 12-month high of $276.69 on March 30, but has since declined 27% to reach the current share price, $201.43. UNP’s YTD and 12-month total returns are -17.5% and +3.6%, respectively, as compared to -21.6% and -15.7% for the S&P 500 (SPY) over the same periods. After bouncing off the YTD lows, the shares have been in decline since mid August, in tandem with the broad sell-off in the S&P 500 over the same period. UNP has also had some negative news over the month or so, which has exacerbated the decline. First, ongoing labor disputes increased the potential for a strike, although a tentative agreement has been reached. Second, UNP was downgraded by Bernstein because of risks associated with inflation. Third, U.S. weekly railroad traffic was reported to have dropped by 2.9% YoY for the week ending Sept. 17. The YTD U.S. rail traffic was down 2.7% as compared to the same period in 2021. Seeking Alpha 12-Month price history and basic statistics for UNP (Source: Seeking Alpha) Even with the declines in rail traffic, UNP’s quarterly earnings have held up so far and the outlook is for continued growth. The consensus outlook is for 10.2% compounded EPS growth over the next three to five years. This is especially notable because U.S. rail traffic has been in decline over the past decade. ETrade Historical (4 years) and estimated future quarterly EPS for UNP. Green (red) values are amounts by which EPS beat (missed) the consensus expected value (Source: ETrade) With the share price declines and growing earnings, UNP’s forward P/E of 17.5 looks more attractive than the P/E from my previous analysis. The TTM P/E, 19.0, is well below the value from January, although the shares continue to look expensive on the basis of a range of measures (Seeking Alpha’s valuation grade is a D). Even so, with a 2.55% forward dividend yield and annualized EPS growth rates of 12%, 15.4%, and 15.3% over the past three, five, and 10 years, respectively, the income potential from UNP is substantial. I last wrote about UNP on Jan. 18, 2022, at which time I was bullish on UNP to the middle of 2022 but neutral for the full year. At that time, the company had delivered a series of quarters of robust growth and rail volume was still increasing. My main concern was the valuation. With a TTM P/E of 26.5, UNP was well above the historical range. The Wall Street consensus rating for UNP was a buy, and the consensus price target implied a total return of 7.65% over the next 12 months. Along with looking at fundamentals and the Wall Street consensus, I also rely on the consensus view among buyers and sellers of options, the market-implied outlook. In mid January, the market-implied outlook was bullish to mid-year but neutral out to mid-January of 2023. The expected volatility, one of the outputs from the market-implied outlook calculations, ranged from 24% (annualized) for the shorter-term outlook to 27% for the full year. As a rule of thumb for a buy rating, I want to see an expected 12-month total return that is at least ½ the expected annualized volatility. Taking the Wall Street consensus price target at face value, UNP fell well below this threshold (7.65% / 24% = 32%). I maintained my overall neutral / hold rating on UNP. Since this post, UNP has returned a total of -14.0% vs. -18.7% for the S&P 500 (SPY). For readers who are unfamiliar with the market-implied outlook, a brief explanation is needed. The price of an option on a stock is largely determined by the market’s consensus estimate of the probability that the stock price will rise above (call option) or fall below (put option) a specific level (the option strike price) between now and when the option expires. By analyzing the prices of call and put options at a range of strike prices, all with the same expiration date, it's possible to calculate a probabilistic price forecast that reconciles the options prices. This is the market-implied outlook. For a deeper explanation and background, I recommend this monograph published by the CFA Institute. With about eight months since my last analysis of UNP, I have calculated updated market-implied outlooks and I have compared these with the current Wall Street consensus outlook in revisiting my overall rating. Wall Street Consensus Outlook for UNP ETrade calculates the Wall Street consensus outlook for UNP by aggregating ratings and price targets from 18 ranked analysts who have published opinions over the past three months. The consensus rating is a buy, as it has been for all of the past year, and the consensus 12-month price target is 18.8% above the current share price. The 12-month price target is somewhat lower than it was back in January, $264.81, but the share price declines have boosted the expected return implied by the consensus price target. The range of individual price targets is relatively tight, increasing confidence in the predictive value of the consensus. ETrade Wall Street analyst consensus rating and 12-month price target for UNP (Source: ETrade) Seeking Alpha’s version of the Wall Street consensus outlook is calculated using the views of 29 analysts who have published ratings and price targets over the past 90 days. The consensus rating is a buy and the consensus 12-month price target is 20.0% above the current share price. Seeking Alpha Wall Street analyst consensus rating and 12-month price target for UNP (Source: Seeking Alpha) While the average analyst rating on UNP has fallen substantially since early 2022, the average rating remains slightly higher than it was three years ago. Seeking Alpha 3-Year history for average analyst rating on UNP (Source: Seeking Alpha) The Seeking Alpha and ETrade calculations of the Wall Street consensus outlook are very similar, consistent with a fairly high level of agreement between analysts. The consensus rating continues to be a buy, as it has been for years. The consensus 12-month price target implies a total return of 22% over the next year, far higher than consensus expected return from mid-January, 7.65%. Market-Implied Outlook for UNP I have calculated the market-implied outlook for UNP for the 3.8-month period from now until Jan. 20, 2023, and for the 8.6-month period from now until June 16, 2023, using the prices of call and put options that expire on these dates. I selected these two dates to provide a view to the start and middle of 2023, as well as because the options expiring in January and June tend to be among the most liquid. The standard presentation of the market-implied outlook is a probability distribution of price return, with probability on the vertical axis and return on the horizontal. Geoff Considine Market-implied price return probabilities for UNP for the 3.8-month period from now until January 20, 2023 (Source: Author’s calculations using options quotes from ETrade) At first glance, the market-implied outlook to Jan. 20, 2023, looks symmetric, with comparable probabilities of positive and negative returns of the same size. Closer inspection shows that the probabilities of positive returns tend to be some elevated. Compare, for example, the probabilities associated with a return of +10% or +15% to those for returns of -10% or -15%. The expected volatility calculated from this distribution is 33% (annualized), considerably higher than the expected volatility from back in January. This is not surprising, given rising uncertainties and risks associated with labor issues, fuel prices, and falling rail volumes. To make it easier to compare the relative probabilities of positive and negative returns, I rotate the negative return side of the distribution about the vertical axis (see chart below). Geoff Considine Market-implied price return probabilities for UNP for the 3.8-month period from now until January 20, 2023. The negative return side of the distribution has been rotated about the vertical axis (Source: Author’s calculations using options quotes from ETrade) This view really highlights that the probabilities of positive returns are consistently elevated as compared to those for negative returns, across a wide range of outcomes (the solid blue line is well above the dashed red live over almost the entirety of the chart above).

Sep 20

Robert Half International: Uncertainty Warrants Caution

Summary The recent performance demonstrated by Robert Half International has been really impressive, with sales and profits rising nicely. On a forward basis, shares look quite affordable, but there is uncertainty over the broader economy. Until the economic picture clears up, investors would be wise to exercise caution. Given current economic conditions, you might not think that the staffing and risk consulting services space would be particularly appealing. Having said that, some of the companies in this market seem to be thriving. One great example can be seen by looking at Robert Half International (RHI). Even as recently as the latest quarter, the company had demonstrated strong revenue growth and a rise in profits and cash flows. On a forward basis, shares look very cheap at this moment in time. But it's also true that concerns over the broader economy could lead to some weakening moving forward. In the event that this transpires, shares go from looking very attractive to looking more or less fairly valued. And given the risk of such an eventual downturn, I do still believe that it's appropriate to rate the business a 'hold' until the picture clears up. Great performance as of late Back in June of this year, I wrote an article about Robert Half International wherein I recognized the company's strong revenue and profit growth but also, I stressed that I was concerned about the current economic environment. Given how shares were priced at the time and the risk that fundamental performance could eventually weaken if economic fears turned into something more tangible, I felt as though a 'hold' rating on the company's stock was appropriate. This kind of rating is my way of saying that I feel the company should generate returns that more or less match the broader market for the foreseeable future. Since then, however, the company has performed slightly worse than I would have anticipated. While the S&P 500 is up by 3.9%, shares of Robert Half International have generated a loss for investors of 3.6%. Author - SEC EDGAR Data Based on this return disparity, you would be excused for thinking that the fundamental performance of the business was weakening. However, that couldn't be further from the truth. In the second quarter of the company's 2022 fiscal year, which is the only quarter for which data is now available that was not available when I last wrote about it, revenue came in strong at $1.86 billion. This rise in sales, amounting to roughly 17.9% year-over-year compared to the $1.58 billion generated the same period of 2021, was driven largely by a 20.2% increase in revenue associated with operations in the US market. More specifically, the company benefited from a 19.2% increase in contract talent solutions due largely to an increase in the number of hours worked by the company's engagement professionals and by an 8.2% rise in weighted average billing rates. Under the permanent placement talent solutions portion of the enterprise, revenue shot up by 39.3%, Thanks to strong demand for candidate placements and higher average fees earned per placement. And finally, under the Protiviti portion of the enterprise, revenue rose a more modest 8.4%, driven largely by a rise in billable hours. Profitability for the company followed a similar trajectory. Net income in the second quarter came in at $175.8 million. This represents an increase of 17.8% over the $149.2 million generated the same time last year. Operating cash flow rose from $165.4 million to $232.9 million. If we adjust for changes in working capital, the increase would have been even more impressive, with the metric climbing from $149.1 million to $280.3 million. Meanwhile, EBITDA for the company also improved, rising from $190.5 million to $318 million. Author - SEC EDGAR Data Thanks to the strong second quarter performance, performance for the first half of the year as a whole has also come in rather strong. Revenue of $3.68 billion represents a year-over-year increase of 23.5% compared to the $2.98 billion experienced one year earlier. Net income rose from $259.8 million to $344.1 million. Operating cash flow grew from $233.5 million to $302.1 million, while the adjusted figure for this increased from $292.4 million to $520.2 million. And finally, EBITDA for the company also expanded, climbing from $343.1 million to $586.7 million. Author - SEC EDGAR Data At this time, we don't really know what to expect for the rest of the fiscal year. The simple approach is to annualize results experienced for the first half of the year. Following this route, we can estimate net income for the company of $792.8 million. Operating cash flow should come in at around $780.3 million, while EBITDA should total roughly $1.36 billion. Based on these figures, the company is trading at a forward price to earnings multiple of 10.6. The price to operating cash flow multiple is 10.8, while the EV to EBITDA multiple of the company should be 5.8. By comparison, these figures for 2021 would be 14.1, 14, and 9.8, respectively. And using data from 2020, these figures would be 27.6, 14.1, and 19.2, respectively. As part of my analysis, I decided to compare the company to five similar firms. On a price-to-earnings basis, these companies ranged from a low of 8.1 to a high of 29.3. Using data from 2021, we can see that four of the five companies are cheaper than Robert Half International. Using the price to operating cash flow approach, the range is between 6.1 and 36.3. In this case, three of the five prospects are cheaper than our target. And using the EV to EBITDA approach, we end up with a range of 4.4 to 15.9. Three of the five companies in this group are cheaper than our target.